The USD/JPY dropped to an intraday low of 119.42 yen per dollar on Wednesday, after private payroll processor ADP said that businesses added 189,000 jobs in March, far short of the economists’ forecast for a gain of 225,000 jobs. The report is a measure of non-farm private sector employment of about 400,000 U.S. businesses which are clients of ADP. The Bureau of Labor Statistics, Department of Labor, will release the U.S. nonfarm payrolls employment data on Friday.

Prior to the ADP jobs report, the USD/JPY traded as high as 120.31 yen per dollar as the Bank of Japan’s (BOJ) quarterly Tankan survey, the leading measure of business sentiment, based on a survey of 11,126 manufacturing and service companies of various sizes, showed that both large manufacturers and non-manufacturers expect business conditions to worsen slightly in the coming three months.

More than two-thirds of all the companies surveyed see further deterioration in conditions, and 83% of the large manufacturers consider conditions as "not so favorable" or "unfavorable." The survey also showed that companies plan to reduce capital spending by nearly 5% this fiscal year, ending March 31, 2016.

The weak Tankan survey came on the heels of the announcement by the Japan Ministry of Economy, Trade and Industry (METI) on Monday, saying that Japan's industrial production fell 3.4% month-on-month in February, worse than the expectations for a 1.8% decline. Japan's January industrial output was revised downward to a 3.7% increase month-over-month, compared with the preliminary reading of a 4% increase. 

As of March 24, there are 104,532 short positions of Japanese Yen (CME:6J), traded on the Chicago Mercantile Exchange (CME), by asset manager/institutional and leveraged funds. This is compared to about 53,706 long positions, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. Short positions have decreased about 10,272 contracts from last week as currency speculators may pare back some risks ahead of the U.S. unemployment report due to be released on Friday.

Technically, the USD/JPY has been trading in a bullish ascending triangle since November 2014, with the head resistances between the 120.50, or ~ 38.2% Fibonacci retracement, and the 122 yen per dollar levels. In the event of an ascending triangle breakout, the USD/JPY could head towards the 124 and 127 yen per dollar level. There is support at the 118.60 yen per dollar level if the USD/JPY decides to pull back. 

For the Nikkei 225, “bad news” is still “good news” as the weak yen is helping to boost the earnings of the big Japanese exporters. The strong performance of the Nikkei 225 in the past few months could also be attributed to the BOJ’s 80 trillion yen asset purchase program and the Japan Government Pension Investment Fund’s (GPIF) asset reallocation from bonds to stocks. If the yen stays weak, the Nikkei 225’s upside potential is towards the 20,000 level.

One should keep an eye on the U.S. dollar index (DXY), which just bounced off 96.2, or the 50% Fibonacci retracement support level, last Thursday. Although the ADP and U.S. payroll report have the tendency to move in the same direction, the correlation between the ADP and the U.S. payroll report isn't very strong. Hence, there is still a possibility that the Friday jobs report could come in better than expectations. In that case, the DXY could head towards the 100-level as the markets believe that the U.S. Federal Reserve will consider gradually hiking the rate despite inflation being below the 2% Fed target.

Here is what Robert McAdie, Global Markets Head of Research and Strategy at BNP Paribas, had to say about the USD/JPY. Mr. McAdie maintains a bullish outlook on the USD/JPY and set the USD/JPY target level of 125 yen per dollar over the next 6 months.